The price of incompetence

(This post is sort of a continuation of this one, which if you have not read it, you should.)

I was wondering if this year I could report that my wife and I were millionaires. It looks like we may have to wait a few years. In fact, given the fallen dollar, deflated house prices, deflated stock prices, rising unemployment and what looks like the return of stagflation, maybe we need to wait a couple of decades to celebrate our seven figure net worth.

Thanks to inflation, being a millionaire these days is no longer that a big deal. However, if we get there we cannot, like Jed Clampett, go buy a mansion in Beverly Hills with a “cement pond”. In the intervening forty years, one million dollars today is worth $164,000 in 1968 dollars, which was when The Beverly Hillbillies was at the top of the Nielsen’s. To reach Jed Clampett’s lofty income we would need about $6.3 million in today’s dollars, a total we are unlikely to achieve.

In fact, our portfolio is down rather sharply. I am trying to keep this unwelcome news in perspective. The reason our net worth was approaching a million dollars was because much of our portfolio was overvalued. Even so, at the end of 2007, Quicken calculated my net worth at $910,000. Today, just ten weeks later, it said our net worth is $860,000. What happened? Who took away $50,000?

Well, there was a drop in the assessed value of my home that I received recently. When the country assessed it last year, it was worth $511,000. This year, even though I put in new energy efficient windows, it is worth $479,000. In 2006, though it was worth $552,000. In two years, the value of my house has dropped 14%.

At the end of 2007, which had already seen the beginnings of a bear market, our investments were worth $479,000. Today they are worth $455,000, which amounts to a drop of five percent in a little over two months. What happened? The subprime mortgage mess kept happening and its effect is rippling across stocks and mutual funds worldwide. Between the losses in my mutual funds and the lower value of my house, since the start of the year, I have lost $54,000. Fortunately, I reduced debt and added income and that cut my total loss to about $50,000.

I am very mindful that we are some of the fortunate financially. Our house cost us $191,000 when we bought it in 1993, so even at $479,000, it has been a good investment, returning on average about $19,000 a year, if you do not factor in the costs of mortgage interest, taxes and upkeep. If we had been a first time homebuyer in 2006 when housing prices reached their peak, we might well be embroiled in the mortgage meltdown now. Most likely the net worth on our house would be negative. We would resent paying against a mortgage for our house when the loan value exceeded its value. We would be hoping we could keep up on my mortgage payments in our uncertain economy. Of course if we had been one of those reckless buyers who purchased a home with no money down and a variable mortgage interest, we would be likely be screwed. I doubt we could pay the higher interest rates and with our house’s value decreasing. We would be inclined to walk away from the whole mess.

There’s the rub of course. It did not have to be this way. There could have been regulations in place that ensured that only people who were reasonably solvent could buy houses. That has not been the governing philosophy of these last eight years. To quote the fictional Gordon Gekko from the 1987 movie Wall Street (and by implication the late Ronald Reagan), “Greed is good”. If you can earn a fast buck, it does not really matter so much how you earned it as long as you made the quick profit. This is the downside of laissez-faire capitalism. It is a primary reason why Republican ideology just does not agree with me. None of the current economic mess had to happen. Instead, we let it happen. We did not so much turn a blind eye to it as we opened the doors and let the bull into the china shop. As crazy as this sounds, we let the bull in because we thought it was good to have a bull in the china shop.

If Democrats had been in charge these last eight years it is likely much of this mess would have been prevented. Had Al Gore been president, his administration would have had an eye on the subprime mortgage problem and likely, it would have been nipped in the bud. Congress, being in Democratic hands, would likely have had oversight hearings, resulting in prudent regulations on the housing and financial industry to preclude these sorts of problems. Unquestionably, we would not now be embroiled in a winless war in Iraq, draining the economy of three billion dollars a week in direct costs and pushing the down the value of the dollar.

Instead, we have a Republican president and a largely Republican rubber stamp Congress. Whatever the President wanted the Congress went along with it. Congressional oversight became a joke. We had a government of, by and for the corporation and very rich people. Not surprisingly, it reflected the values of corporations and very rich people who, unsurprisingly, want themselves to get a lot richer and the expense of someone else. Tax cuts went disproportionately to the richest people. When wealth trickled down at all, it trickled down to shareholders, not to the laborers who sustained the economy. Moreover, all this additional wealth did little to improve the commonweal. Our infrastructure deteriorated. The resulting detritus is easy enough to see around you: homes foreclosed, gas prices going through the roof, a crumbling infrastructure, the recession that we know is upon us, and the return of stagflation.

My real financial concern is more personal. With the failure of the Wall Street investment firm Bear Stearns, the question is really, “Who is next?” Our portfolio is reasonably diversified, but we have over $150,000 in various Vanguard funds in a retirement portfolio. If Vanguard goes the way of Bear Stearns, will our portfolio be safe? In other words, just how safe is our financial system right now?

Doubtless, I am not the only investor deeply troubled by these events and wondering if there is a severe recession or even a depression around the corner. It is evidenced by $111 a barrel oil and gold priced at over $1000 an ounce. It is clear that savvy investors are lining up by the exit doors. It will take just one little jolt to have them bolt out of the room. The Federal Reserve is trying to preclude this possibility. That is why is took the nearly unprecedented step of offering Bear Stearns a line of credit of $200 billion.

I am irked because this financial crisis was completely avoidable. I am outraged though because I am paying the price for government incompetence. I can see it in my net worth, where $50,000 has disappeared from my portfolio since the start of the year. Multiply my small misfortune across the United States and we have a huge financial meltdown that could be catastrophic.

This is not business as usual, unless you expect incompetence. This is government abdicating its job. This is the White House and Congress largely asleep at the switch, reacting to events instead of preventing them. In case it is not clear to you, we have governments to protect the interest of its citizens.

Who will win the White House race in 2008? Who will win the Congress? There is no doubt in my mind. Democrats will win. You can see it in poll numbers, where self-described Democrats outrank self-described Republicans by more than ten points. You can see it in the primaries and caucuses where Democrats are participating at rates unseen in a generation. You can get a preview of the election by looking at the results of a special election held last week in Illinois to fill former House speaker Dennis Hastert’s vacated seat. A Democrat won it.

For eight years, we have seen what happens when Republicans order the government and the economy the way their principles dictate. What we have is a financial mess not seen since the Great Depression. That event was another completely preventable economic event that was brought to us by Republicans. Will we ever learn? Will Republicans ever understand that their economic principles are not just fundamentally bankrupt, but fundamentally wrong? I doubt it. They are clueless folk. They are looking at the mirage of Reagan’s shining city on the hill, while ignoring that America is falling apart around them.

At least the American public is now fully, painfully and nervously awake. I can only hope that we can get the government we need before our current economic danger devolves into an economic catastrophe.